Japan's Yen Weakens Despite Expected Rate Hike Amid US Tightening

With the Bank of Japan (BOJ) expected to raise its policy rate to a 31-year high of 1.25% on October 18, the yen unexpectedly weakened against the dollar. In New York foreign exchange markets on October 17, the yen fell as low as 156.2 per dollar at one point, dropping about 4 yen from its early October peak near 152.

Typically, a BOJ rate hike would narrow the US-Japan interest rate gap and strengthen the yen. However, this time the potential resumption of Federal Reserve tightening has offset that effect. Analysts note that even if Japan raises rates by 0.25 percentage points, the widening gap could persist if the U.S. tightens at a similar or faster pace.

Market expectations for yen strength have rapidly retreated. According to the Nihon Keizai Shimbun, eight out of ten foreign exchange experts surveyed anticipate the yen will weaken again by year-end, citing persistent interest rate differentials, rising oil prices, and worsening trade balances as key factors. Higher oil prices increase Japan's import costs due to its heavy reliance on oil imports, adding downward pressure on the yen.

On the same day, the won-dollar exchange rate also surged, with the won falling 13.6 won against the dollar to 1,382.2 as of 3:30 PM local time, rising nearly 40 won over three trading days.